Kumo Breakout
Kumo Breakout trading or "Kumo Trading" is a trading strategy that can be used on multiple time frames, though it is most widely used on the higher time frames (e.g.: Daily, Weekly, Monthly) of the position trader. Kumo breakout trading is the purest form of trend trading offered by the Ichimoku charting system, as it looks solely to the kumo and price's relationship to it for its signals. It is "big picture" trading that focuses only on whether price is trading above or below the prevailing kumo. In a nutshell, the signal to go long in Kumo breakout trading is when price closes above the prevailing kumo and, likewise, the signal to go short is when price closes below the prevailing kumo.See the chart in Figure V below for an example of a kumo breakout buy signal:
Entry
The entry for the kumo breakout trading strategy is simple - when price closes above/below the kumo, the trader places a trade in the direction of the breakout. Nevertheless, care does need to be taken to ensure the breakout is not a "head fake" which can be especially prevalent when the breakout takes place from a flat top/bottom kumo. To ensure the flat top/bottom is not going to attract price back to the kumo, it is always advisable to look for another Ichimoku structure to "anchor" your entry to just above/below the kumo breakout. This anchor can be anything from a key level provided by the chikou span, a kumo shadow or any other appropriate structure that could act as additional support/resistance to solidify the direction and momentum of the trade.
Kumo breakout traders also make good use of the leading kumo's sentiment before committing to a trade. If the leading kumo is a Bear kumo and the kumo breakout is also Bear, then that is a very good sign that the breakout is not an aberration of excessive volatility, but rather a true indication of market sentiment. If the leading kumo contradicts the direction of the breakout, then the trader may want to either wait until the kumo does agree with the direction of the trade or use more conservative position sizing to account for the increased risk.
Exit
The exit from a kumo breakout trade is the easiest part of the whole trade. The trader merely waits for their stop-loss to get triggered as price exits the opposite side of the kumo on which the trade is transpiring. Since the trader has been steadily moving their stop-loss up with the kumo during the entire lifespan of the trade, this assures they maximize their profit and minimize their risk.
Stop-Loss Placement
Being a "big picture" trend trading strategy, the stop-loss for the kumo breakout strategy is placed at the point that the trend has been invalidated. Thus, the stop-loss for a kumo breakout trade must be placed on the opposite side of the kumo that the trade is transpiring on, 10 - 20 pips away from the kumo boundary. If price does manage to reach the point of the stop-loss, the trader can be relatively assured that a major trend change has taken place.
Take Profit Targets
While traditional take profit targets can be used with the kumo breakout trading strategy, it is more in-line with the long-term trend trading approach to simply move the stop-loss up/down with the kumo as it matures. This method allows the trade to take full advantage of the trend without closing the trade until price action dictates unequivocally that the trend is over.
Last edited: